Following up on the ECJ, also the Federal Fiscal Court had already ruled in 2019 that supervisory board members who only receive a fixed remuneration do not qualify as entrepreneurs within the meaning of the German VAT Act (i.e. “taxable person” as per the VAT Directive 2006/112/EC). The tax authorities have now adopted the case law on remuneration risk with a letter from the Federal Ministry of Finance dated 8 July 2021.
In future, supervisory board members must examine on a mandate-specific basis, i.e. separately for each position as a supervisory board member, whether the payments agreed for this purpose constitute a remuneration risk. If supervisory board members do not bear such a risk, they are not exercising this activity “independently”/self-employed as defined by Sec. 2 of the German VAT Act (equal to Art. 9 para. 1 VAT Directive 2006/112/EC). These requirements also apply to members of other bodies that serve to monitor the management of a legal entity or association of persons.
If supervisory board members only receive a non-variable fixed remuneration, regardless of whether this consists of cash payments or benefits in kind, they also do not bear any remuneration risk and are therefore not self-employed. The tax authorities understand fixed remuneration to mean, in particular, lump-sum expense allowances paid for the duration of membership of the supervisory board.
On the other hand, attendance fees that are only paid for actual participation in meetings and expense allowances that are calculated on the basis of actual expenditure do not constitute fixed remuneration, i.e. a variable remuneration is given.
In the event of a combination of fixed and variable compensation components, the following shall apply: in principle, an independent activity can be assumed (in total) if the variable components of the remuneration amount to at least 10% of the total remuneration in the calendar year; in this respect, expense allowances received are to be taken into account when determining the total remuneration. Travel expense reimbursements are not to be considered in this quota calculation, as they do not constitute remuneration components. However, the letter provides that in justified cases it is possible to deviate from the above quota determination (whereas details for any such justified cases are not provided).
The amended tax administration interpretation is to be applied in all open cases. However, services performed up until 31 December 2021 may still be assessed according to the previous regulations.
Subsumption
A clarifying statement from the tax authorities had long been expected by companies and board members. With regard to the requirements for the classification of remuneration components, it now seems possible to generally draw a line between fixed and variable remuneration. However, further clarity would be desirable in connection with mixed remuneration consisting of fixed and variable components as well as how to determine the date of supply of the services of a supervisory board member – should it be the end of the company’s fiscal year or the annual general meeting for such a fiscal year.
Ultimately, however, it becomes apparent that the design of the remuneration models can have a direct influence on the cost burden of companies that are not or are only partially entitled to deduct input tax. However, the corresponding effects on the respective board member need to be considered and aligned, e.g. loss of input VAT deduction.
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